Weak Tailwinds and a Sick Economy

News out of and about Nigeria, last week, was largely upbeat. Chances of the 2017 appropriation bill being passed a lot earlier than has been the norm since 1999, were enhanced with the passage by the National Assembly of the 2017-2019 medium term expenditure framework (MTEF) and fiscal strategy paper (FSP). Okay, so the legislators tinkered with a few assumptions, especially by pushing up the document’s proposed oil benchmark price from US$42.50 per barrel (pb) to US$44.5pb. But then, the agreement between the oil producers’ cartel (OPEC) and a few non-members to support global oil prices by cutting their respective domestic production levels appeared to hold: the West Texas Intermediate blend closed Saturday at US$53.24pb, even as OPEC announced, weekend, that it had already removed 1.5 million barrels per day (bpd) from the market and Russia another 100,000bpd (more than was agreed at their December 10 2016 meeting).

It also emerged that in the first two weeks of this year, a combination of higher oil prices and improved crude exports (following the resumption of the payment of stipends to the militants in the oil rich Niger Delta region) pushed the contribution of crude oil sales to the nation’s gross external reserves up by US$1.380bn (or 5.3%). On the back of which, the nation’s gross external reserves closed January 16, 2017 at US$27.22bn (up from US$25.84bn as at December 30, 2015).

If the finance minister was to be believed, the federal government has completed plans to deal a mortal blow on the parallel market for the naira, and by extension, restore the national currency’s “lost glory”. And in Davos, Switzerland, where he was head of the Nigerian delegation to the summit of the World Economic Forum (WEF), the vice president announced the end of the economy’s recession. Much earlier in the week, the IMF had revised its forecast for domestic growth this year from the 0.6% it put out when its World Economic Outlook (WEO) was released in October 2016, to 0.8% in the January 2017 edition of the WEO.

Welcome though all this optimism is, all of it is, in truth, reliant on one variable. As the IMF put it, “Nigeria’s forecasts were also revised up, primarily reflecting higher oil production due to security improvements”. Put differently, even as it could be argued that the economy’s near-term prospects have brightened recently, not much has changed, structurally, in the economy to support a brighter medium-term outlook. This fact was underscored last week with the National Bureau of Statistics latest report on domestic prices indicating inflation was up in December by 18.55% (year-on-year) — “0.07 percent points higher from the rate recorded in November (18.48%)”.

If our poor economic performance last year taught any lesson, it is of the need to improve domestic productivity growth in order that output growth may compensate for our rather high population growth rate, while leaving room to spare. Improvements to domestic productivity will include better state of the art infrastructure (especially, high-speed broad-band access), up-to-date school curriculum (coding being taught in the secondary schools), better health-care services, more liberal business environments, and more effective government spend. These should combine to drive trend GDP growth rate to between 7% and 10%, enough to compensate for rising population levels.

In other words, with 0.8% growth this year, we barely scratch the surface of the economy’s problems. Indeed, it is fair to suppose that both unemployment and inflation will continue to rise this year. Part of the impetus for the latter will be the continued failure of domestic policy responses. Much was made of this dimension of our polity last year, by commentators on the wrong side of this government.

Unfortunately, none of the developments last week supported a sense of an impending correction of the poor policy prescriptions this year. If anything, the federal government’s sense of what must be done to address the naira’s exchange rate crisis only further exacerbates the fear over poor policies.

It is clear that — as a very good friend reminded me, last week — our government is not aware of the fact that at one level, the naira is simply a commodity: with two prices. The first price is domestic — inflation — an expression of how much a given amount of the national currency buys over clearly defined time frames. The second is external — its exchange rate — an expression of how much of it non-nationals are willing to accept in exchange for their own currency.

Too much of the naira in circulation at any given time drives up how much of it is used to buy goods locally, and how much of it foreigners demand in exchange for their own currency. So, rather than suggest the solution to the naira’s exchange rate is the outcome of some tactical approach to the problem, including through having bureaux de change operators quote prices on some websites, better instead that the government addresses the “immediate and remote causes” of the central bank having extended so much credit to it last year.

All last week’s “gains” will be temporary without addressing such fundamental questions.

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